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Women’s specialty retailer Ann Inc reported Q2 fiscal 2014 earnings per share of $0.70, which was in line with analysts’ estimates. However, the company’s net sales at $648.7 million fell short of street estimates by almost $2 million. Moreover, the retailer slashed its full year revenue guidance to $2.56 billion, down from its earlier outlook of $2.61 billion. It now expects comparable sales for the year to remain flat, while it earlier projected them to increase in low-single digits. Following these results, Ann’s shares fell by close to 5%.

Driven by weak foot traffic and the gradual online shift, the retailer’s comparable sales declined by 2.3% during the quarter. Ann was more aggressive on promotions in Q2 than it initially expected, which dragged its gross margins down by 230 basis points to 52.4%. For the full year, the company expects its gross margins to further shrink by 40 basis points. It appears that the retail environment in the U.S. has started troubling the upscale retailer, which had performed reasonably well so far.

According to a recent report published on The Wall Street Journal, activist investor Engine Capital has recommended that Ann’s management consider a sale of the company. This came as a surprise considering that Ann hasn’t been the worst performer in the sluggish U.S. apparel market. Engine Capital believes that the market isn’t valuing the upscale retailer fairly and it could easily fetch around $2.5 billion, while its market cap stands at $1.8 billion.

Soon after Ann released its Q2 results, reports surfaced that Engine Capital is pressing Ann to consider a sale of the company. Engine Capital, along with its affiliates, holds just a 1% stake in the company, and its suggestion might not have a strong influence on Ann’s management, even though the retailer said that it is open to discussions with its investors. Nevertheless, Engine Capital and hedge-fund partner Red Alder LLC believe that Ann could fetch a price of $50-55 per share, which is almost 45% above its current market price. Sources close to the matter said that the investors are willing to launch a public campaign as their discussions with Ann’s management over the last few weeks haven’t been fruitful. They believe that the company isn’t moving fast enough in the challenging environment.

This isn’t the first time that Engine Capital is pushing for changes at a women’s retailer. Its founder, Arnaud Ajdler, has invested in other specialty chains as well. He was a board member at Charming Shoppers in 2012, and currently holds the position of chairman at Destination Maternity Corp, a maternity clothing chain. However, Engine Capital’s pressure on Ann’s board might be minimal, as the company’s largest investor, Golden Gate Capital, stands in support of the company’s management. Golden Gate Capital disclosed a 9.5% stake in Ann earlier this year and stated that it invested in the company from a long term perspective, and hence wasn’t pushing Ann’s management for a sale.

The Reason Is Not The Recent Slowdown

Although Ann’s performance over the last year and a half has been somewhat sluggish, it has done better than most casual apparel retailers. The company may have lowered its 2014 outlook on account of weak traffic, but it still remains one of the strongest upscale women’s specialty retailers in the U.S. Despite certain merchandise issues at LOFT, the Ann Taylor brand has been very efficient in attracting customers. A recent slowdown in sales growth on account of macroeconomic weakness in the U.S. isn’t a big enough reason for Ann to consider selling itself. With its loyal customer base and strong omni-channel platform, we believe that the company is well positioned for the long run.

Engine Capital and Red Alder don’t seem too concerned about the company’s recent slowdown, but they believe that the market is undervaluing the stock, and Ann can fetch its real value through a strategic or private equity buyer. The company has little debt and over $150 million in cash. According to sources, if Ann’s management doesn’t find an attractive potential buyout offer, activists will suggest a large debt-funded share repurchase.